<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
February 18, 2000
Date of Report (Date of earliest event reported)
WESCO FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
California 1-04720 95-2109453
(State of Incorporation) (Commission File Number) (IRS Employer
Identification Number)
301 East Colorado Boulevard, Suite 300
Pasadena, California 91101
(Address of Principal Executive Offices) (Zip Code)
(626) 585-6700
(Registrant's Telephone Number, including Area Code)
<PAGE> 2
ITEM 7. Financial Statements and Exhibits
(a) The consolidated financial statements of CORT Business Services Corporation
("CORT") are attached as an Exhibit to this Report on Form 8-K/A.
(b) Pro forma financial information: See pages 3 - 5.
(c) Exhibit: The consolidated balance sheets of CORT Business Services
Corporation and subsidiary as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1999, and
the accompanying report of CORT's independent accountants.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: April 28, 2000
WESCO FINANCIAL CORPORATION
By:
------------------------------
Name: Jeffrey L. Jacobson
Title: Vice President and
Chief Financial Officer
2
<PAGE> 3
ITEM 7 (b) Pro forma financial information.
On February 18, 2000, a wholly owned subsidiary of Wesco Financial
Corporation ("Wesco") acquired, by tender offer, 12,901,723 shares (98.1% of the
outstanding shares) of common stock of CORT Business Services Corporation
("CORT") at $28.00 per share (a total of approximately $361 million). On March
3, 2000, each CORT share not tendered was converted into a right to receive
$28.00 cash, without interest, subject to appraisal rights, and CORT merged into
its parent; the merged entity assumed the CORT name and became an indirect
wholly owned subsidiary of Wesco. The tender offer and merger were made pursuant
to an Agreement and Plan of Merger dated as of January 14, 2000. The aggregate
cash purchase price, including fees and expenses, was funded to the extent of
$354 million through sales of investments and use of available cash,
supplemented by $31 million of short-term line-of-credit borrowings bearing
interest initially at 6.4%.
Set forth below are unaudited pro forma condensed combined financial
statements as follows: a balance sheet as of December 31, 1999 assuming the
acquisition of CORT and the merger had occurred on that date; a statement of
income for the year ended December 31, 1999 assuming the acquisition of CORT and
the merger had occurred on January 1, 1999. Neither pro forma statement is
necessarily indicative of financial condition or results of operations that
might have resulted if the acquisition and merger had actually taken place on
the assumed date, nor should they be considered indicative of financial
condition or results that may be attained in the future; these pro forma
statements constitute "forward-looking" statements as defined and explained at
the end of Item 7 of Wesco's Form 10-K Annual Report for the year ended December
31, 1999, previously filed with the Securities and Exchange Commission.
The pro forma statements have been prepared as follows: "Wesco" amounts
were derived from Wesco's consolidated financial statements included in the Form
10-K Annual Report referred to in the prior paragraph. "CORT" amounts were
derived from CORT's consolidated financial statements for the year ended
December 31, 1999, attached as an Exhibit to this Form 8-K/A. (Those historical,
audited statements should be read when reading the pro forma statements.) Pro
forma adjustments made in combining Wesco and CORT amounts as of earlier assumed
acquisition dates are keyed to explanations of the more important underlying
assumptions.
3
<PAGE> 4
WESCO FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Wesco CORT Adjustments Combined
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Assets
Cash and investments ....................... $2,591,190 $ 35,090 $ (354,000)(a) $2,272,280
Accounts receivable ........................ 8,685 19,620 28,305
Rental furniture ........................... 208,811 208,811
Property, plant and equipment .............. 11,414 42,853 54,267
Goodwill of acquired businesses ............ 28,556 76,186 158,387 (c) 263,129
Other assets ............................... 12,350 9,305 21,655
---------- --------- ----------- ----------
$2,652,195 $ 391,865 $ (195,613) $2,848,447
========== ========= =========== ==========
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses ...... $ 3,675 $ 27,956 $ $ 31,631
Insurance losses and expenses .............. 33,642 -- -- 33,642
Deferred rental revenue .................... 14,060 14,060
Borrowings ................................. 3,635 84,400 31,000 (a) 119,035
Income taxes, principally deferred ......... 707,345 35,687 (6,570)(d) 736,462
Other liabilities .......................... 8,526 9,719 18,245
---------- --------- ----------- ----------
756,823 171,822 24,430 953,075
Total equity ............................... 1,895,372 220,043 (220,043) 1,895,372
---------- --------- ----------- ----------
Total liabilities and equity ............... $2,652,195 $ 391,865 $ (195,613) $2,848,447
========== ========= =========== ==========
</TABLE>
(a), (c) and (d) are explained on the next page.
4
<PAGE> 5
WESCO FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Wesco CORT Adjustments Combined
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues ............... $ 64,571 $ 354,084 $ -- $ 418,655
Insurance premiums earned ................ 17,655 -- 17,655
Dividend and interest income ............. 49,679 -- (20,000)(b) 29,679
Realized gains, net ...................... 12,819 -- 12,819
Other .................................... 982 982
--------- --------- --------- ---------
145,706 354,084 (20,000) 479,790
--------- --------- --------- ---------
Costs and expenses:
Costs of products and services sold ...... 50,728 89,916 140,644
Insurance losses and expenses ............ 7,366 -- 7,366
Selling, general and administrative ...... 9,483 209,708 219,191
Amortization of goodwill ................. 782 2,442 3,395(c) 6,619
Interest on borrowings ................... 2,549 5,769 1,984(b) 10,302
--------- --------- --------- ---------
70,908 307,835 5,379 384,122
--------- --------- --------- ---------
Income before income taxes ................. 74,798 46,249 (25,379) 95,668
Provision for income taxes ................. (20,655) (19,548) 7,694(d) (32,509)
--------- --------- --------- ---------
Net income ........................... $ 54,143 $ 26,701 $ (17,685) $ 63,159
========= ========= ========= =========
Net income per capital share
(based on 7,120 shares).................... $ 7.60 $ 8.87
========= =========
</TABLE>
- -----------
Explanations of assumptions underlying pro forma adjustments:
(a) The $385 million cash purchase was funded to the extent of $354 million
through sales of mainly fixed-maturity investments and use of available
cash, supplemented by $31 million of short-term line-of-credit borrowings
bearing interest initially at 6.4%.
(b) Wesco's management believes a reasonable approach to estimating the loss of
income in 1999 that would have resulted from funding the acquisition at the
beginning of that year is (1) to calculate investment income on the $354
million of investments and cash equivalents liquidated (estimated to be
$20,000) and (2) to provide interest expense on the $31 million borrowed
(calculated to be $1,984 assuming a rate of 6.4%).
(c) The CORT acquisition has been accounted for under the purchase method of
accounting. It has been assumed that the fair value of CORT's tangible
assets approximated their net book value at date of acquisition.
Amortization of the excess of purchase price over CORT's tangible net
assets ("goodwill") has been calculated on a straight-line basis over 40
years.
(d) The pro forma income tax adjustment has been computed at Wesco's effective
rate after giving effect to the non-deductibility of goodwill amortization
for tax purposes.
5
<PAGE> 1
EXHIBIT 99
CORT BUSINESS SERVICES CORPORATION
Financial Statements
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
<PAGE> 2
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
As of December 31,
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 703 $ --
Accounts receivable, less allowance for doubtful accounts
of $3,179 and $3,019 in 1998 and 1999, respectively 14,585 19,620
Prepaid expenses 5,918 5,724
Rental furniture, net (note 3) 189,059 208,811
Property, plant and equipment, net (note 4) 43,861 42,853
Investments (note 5) 3,000 35,090
Other receivables and assets, net (note 6) 3,048 3,581
Goodwill, net of accumulated amortization of $6,159 and $8,601 in
1998 and 1999, respectively (note 13) 72,722 76,186
-------- --------
$332,896 $391,865
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,417 $ 5,717
Rental security deposits 9,581 9,719
Accrued expenses (note 11) 21,076 22,239
Deferred rental revenue 11,541 14,060
Long-term debt (note 7) 90,800 84,400
Deferred income taxes (note 6) 20,819 35,687
-------- --------
157,234 171,822
-------- --------
Commitments and contingencies (notes 8, 10 and 17)
Stockholders' equity (notes 9 and 12):
Common stock, voting, $.01 par value, 20,000,000 shares
authorized, 13,084,541 and 13,099,300 shares issued and outstanding
in 1998 and 1999, respectively 131 131
Common stock, Class B, nonvoting, $.01 par value, 20,000,000 shares
authorized, and none issued and outstanding -- --
Additional paid-in capital 105,940 106,100
Retained earnings 69,591 96,292
Accumulated other comprehensive income -- 17,520
-------- --------
Total stockholders' equity 175,662 220,043
-------- --------
$332,896 $391,865
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 3
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Furniture rental $237,212 $265,871 $295,232
Furniture sales 50,006 53,093 58,852
-------- -------- --------
Total revenue 287,218 318,964 354,084
Operating costs and expenses:
Cost of furniture rental 45,634 47,863 53,132
Cost of furniture sales 30,257 32,354 36,784
Employee, delivery and advertising
expenses 114,674 128,710 145,917
Occupancy, utilities and non-rental
depreciation 27,747 32,496 38,621
Amortization of goodwill 1,546 1,935 2,442
Other operating expenses 21,052 22,959 23,049
Terminated merger expenses (note 17) -- -- 2,121
-------- -------- --------
Total costs and expenses 240,910 266,317 302,066
-------- -------- --------
Operating earnings 46,308 52,647 52,018
Interest expense, net 8,374 7,837 5,769
-------- -------- --------
Income before income taxes and
extraordinary loss 37,934 44,810 46,249
Income tax expense (note 6) 15,608 18,907 19,548
-------- -------- --------
Income before extraordinary loss 22,326 25,903 26,701
Extraordinary loss on early retirement of
debt, net of income tax benefit of
$1,672 (notes 6 and 7) -- 2,508 --
-------- -------- --------
Net income $ 22,326 $ 23,395 $ 26,701
======== ======== ========
Earnings per common share before extraordinary
loss (note 14) $ 1.74 $ 1.99 $ 2.04
Extraordinary loss per common share -- .19 --
-------- -------- --------
Earnings per common share $ 1.74 $ 1.80 $ 2.04
======== ======== ========
Weighted average number of common shares used
in computation 12,804 13,019 13,095
-------- -------- --------
Earnings per common share before extraordinary
loss--assuming dilution (note 14) $ 1.67 $ 1.92 $ 1.99
Extraordinary loss per common share--assuming
dilution -- .19 --
-------- -------- --------
Earnings per common share--assuming dilution $ 1.67 $ 1.73 $ 1.99
======== ======== ========
Weighted average number of common shares used
in computation -- assuming dilution 13,378 13,491 13,419
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 127 $101,155 $ 23,870 -- $125,152
Net income -- -- 22,326 -- 22,326
Income tax benefit from stock
options exercised -- 1,177 -- -- 1,177
Issuance of common stock from
exercise of stock options 1 660 -- -- 661
Issuance of common stock from
exercise of warrants 1 15 -- -- 16
-------- -------- -------- -------- --------
Balance, December 31, 1997 129 103,007 46,196 -- 149,332
Net income -- -- 23,395 -- 23,395
Income tax benefit from stock
options exercised -- 2,109 -- -- 2,109
Issuance of common stock from
exercise of stock options, net 1 810 -- -- 811
Issuance of common stock from
exercise of warrants 1 14 -- -- 15
-------- -------- -------- -------- --------
Balance, December 31, 1998 131 105,940 69,591 -- 175,662
Comprehensive Income:
Net income -- -- 26,701 -- 26,701
Net unrealized investment gain -- -- -- 17,520 17,520
--------
Total comprehensive income 44,221
Income tax benefit from stock
options exercised -- 84 -- -- 84
Issuance of common stock from
exercise of stock options -- 76 -- -- 76
-------- -------- -------- -------- --------
Balance, December 31, 1999 $ 131 $106,100 $ 96,292 $ 17,520 $220,043
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 5
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,326 $ 23,395 $ 26,701
Proceeds of disposals of rental furniture in
excess of gross profit 27,697 31,487 36,772
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early retirement of debt -- 2,508 --
Depreciation and amortization:
Rental furniture 33,704 36,461 39,943
Other depreciation and amortization 4,871 6,213 7,318
Goodwill 1,546 1,935 2,442
Deferred financing fees 726 629 60
Rental furniture inventory shrinkage 3,567 2,927 3,027
Deferred income taxes 3,972 4,762 3,190
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable (364) 1,271 (4,784)
Prepaid expenses 195 (1,619) 197
Other receivables and assets 83 (1,248) (2,338)
Accounts payable, accrued expenses and
security deposits, net 262 (2,465) 2,785
Deferred rental revenue 2,054 1,933 2,519
--------- --------- ---------
Net cash provided by operating activities 100,639 108,189 117,832
--------- --------- ---------
Cash flows from investing activities:
Purchases of rental furniture (76,010) (81,671) (96,416)
Portfolio acquisitions (16,851) (21,970) (8,467)
Purchases of property, plant and equipment (8,628) (9,173) (6,231)
Sale of property, plant and equipment 990 275 203
Purchase of AFR (166) -- --
Purchase of Instant Interiors -- (16,695) --
Purchase of investment -- (3,000) (1,300)
--------- --------- ---------
Net cash used in investing activities (100,665) (132,234) (112,211)
--------- --------- ---------
Cash flows from financing activities:
Repayments of senior notes (68) (49,932) --
Payments of premium to retire senior notes -- (3,503) --
Payment of deferred financing fees -- (243) --
Borrowings on the line of credit 54,200 131,500 59,100
Repayments on the line of credit (56,600) (53,900) (65,500)
Issuance of common stock 677 826 76
Other 1,694 -- --
--------- --------- ---------
Net cash provided (used) by financing
activities (97) 24,748 (6,324)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (123) 703 (703)
Cash and cash equivalents at beginning of year 123 -- 703
--------- --------- ---------
Cash and cash equivalents at end of year $ -- $ 703 $ --
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 7,664 $ 8,541 $ 6,176
Income taxes 11,626 11,433 16,778
Non-cash financing and investing activities:
Tax benefit from exercise of stock options $ 1,177 $ 2,109 $ 84
Unrealized gain on investment, net -- -- 17,520
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) FORMATION AND DESCRIPTION OF THE COMPANY
CORT Business Services Corporation (the "Company") is a holding company with no
independent operations and no material assets other than its ownership of all
the outstanding capital stock of CORT Furniture Rental Corporation ("CFR"). The
Company is largely dependent on the receipt of dividends or distributions from
CFR to fund its obligations. CFR is a provider of rental furniture, accessories
and related services to both corporate and individual customers. In addition,
CFR sells previously rented furniture.
(2) SUBSEQUENT EVENT
In January 2000, Wesco Financial Corporation ("Wesco"), through an indirect
subsidiary (the "Purchaser"), commenced a cash tender offer to purchase all
shares of common stock of the Company for $28.00 per share. The cash tender
offer was successfully completed on February 18, 2000. Wesco acquired
approximately 12.9 million shares of the approximately 13.2 million shares
outstanding. As a result of this tender offer and subsequent merger of the
Purchaser into the Company on March 3, 2000, the Company is now an indirect,
wholly owned subsidiary of Wesco.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Presentation
The consolidated financial statements as of December 31, 1998 and 1999, and for
the years ended December 31, 1997, 1998 and 1999, include the accounts of CORT
Business Services Corporation and its wholly owned subsidiary. All significant
inter-company transactions have been eliminated.
(b) Accounting Estimates
The preparation of consolidated financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ from these estimates.
(c) Rental Furniture
Rental furniture includes residential and office furniture, which is rented to
customers or is available for rental and/or sale, and is recorded at depreciated
cost. Rental furniture is depreciated primarily on a declining-balance method
over 3 to 5 years, with an estimated salvage value of 25 to 40 percent of
original cost. Accumulated depreciation on rental furniture was $79,871,000 and
$98,655,000 at December 31, 1998 and 1999, respectively. Reserves for purchase
options and shrinkage on rental furniture were $2,825,000 and $2,971,000 at
December 31, 1998 and 1999, respectively. Furniture no longer meeting rental
standards is held for sale.
Furniture rentals are recognized as revenue in the month they are due. Rental
payments received prior to the month due are recorded as deferred rental
revenue. Cost of furniture rental includes depreciation expense, inventory
losses, repairs and maintenance, net book value of furniture sold under lease
purchase options and costs of accessories.
Certain of CFR's leases include purchase options whereby the customer can
receive title to the furniture upon satisfaction of certain conditions.
Generally, these leases are short term and must be extended by the customer in
order for the purchase option to apply. CFR provides reserves to reduce the net
book value of furniture under such leases based on the length of time the
furniture has been out on lease and the likelihood of the exercise of the
options.
The Company considers the proceeds from the sale of rental furniture as an
element of cash flow from operations. Accordingly, the proceeds received in
excess of the gross profit recognized on sales of rental furniture are added to
net income in deriving cash flow from operations in the accompanying
consolidated statements of cash flows.
(d) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets as
follows: buildings 50 years; furniture, fixtures, machinery and equipment from 5
to 10 years; computer hardware and software from 3 to 5 years; and leasehold
improvements over the shorter of the term of the related leases or the estimated
useful lives.
5
<PAGE> 7
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Investments
Investments consist of marketable securities and an equity ownership of less
than 20% in a company. Marketable securities are classified as either available
for sale or trading. Marketable securities deemed by management to be available
for sale are reported at fair value with net unrealized gains or losses reported
within stockholders' equity. Trading investments are recorded at fair market
value with net unrealized gains or losses recorded as miscellaneous income. The
equity ownership is accounted for under the cost method and evaluated for
recoverability on a regular basis.
(f) Long-lived Assets
Goodwill, representing the excess of the cost over the fair value of net assets
acquired, is amortized using the straight-line method over 20 to 40 years. The
Company continually evaluates the carrying value of long-lived assets, including
goodwill and rental furniture. Any impairment would be recognized when the
expected future undiscounted operating cash flows derived from such assets is
less than their carrying value.
(g) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and investments having a
maturity of three months or less on the date of purchase. Cash and cash
equivalents at December 31, 1998 consisted primarily of overnight repurchase
funds.
(h) Rental Security Deposits
The Company may require a non-interest bearing security deposit of one month's
rent based on the Company's evaluation of the credit-worthiness of the customer.
The security deposit is returned at the end of the lease provided that all lease
terms have been satisfied.
(i) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record stock-based
employee compensation plans at fair value. The Company has elected to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
employee stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the exercise price an
employee must pay to acquire the stock.
(j) Income Taxes
Income taxes are reported under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) Deferred Financing Fees
Costs incurred with the issuance of long-term debt are capitalized and amortized
over the term of the related debt using a method which approximates the
effective interest method.
(l) Earnings Per Common Share
Earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Earnings
per common share--assuming dilution is computed by dividing net income by the
weighted average number of shares of common stock and dilutive potential common
stock. Dilutive securities are comprised entirely of stock options and warrants.
The Company has no other potentially dilutive securities.
(m) Advertising Costs
Advertising production costs are expensed the first time the advertisement is
run. Media placement costs are expensed in the month the advertising appears. At
December 31, 1998 and 1999, approximately $2,475,000 and $2,750,000 of deferred
advertising expenses were reported in prepaid expenses. Advertising expenses
were approximately $12,632,000, $14,552,000, and $14,180,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
(n) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and presenting of comprehensive
income and its components in a full set of financial statements. Comprehensive
income of the Company includes net income and unrealized gain on investments.
6
<PAGE> 8
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------- --------
<S> <C> <C>
Land and land improvements $ 6,772 $ 6,772
Buildings and improvements 15,650 15,650
Machinery and equipment 6,183 6,331
Leasehold improvements 19,242 22,942
Computer hardware and software 11,060 13,022
Furniture and fixtures 2,803 3,370
Other 2,880 2,628
------- -------
64,590 70,715
Accumulated depreciation
and amortization 20,729 27,862
------- -------
$43,861 $42,853
======= =======
</TABLE>
(5) INVESTMENTS
At December 31, 1999, investments consisted of marketable securities, both
available for sale and trading, and an equity ownership of less than 20% in a
company. Available for sale securities consist of 437,696 shares of
HomeStore.com, Inc common stock. This investment was originally made in
SpringStreet, Inc. which merged with HomeStore.com, Inc. and the latter made an
initial public offering in August 1999. Ten percent of this investment is
subject to certain restrictions under the merger agreement between SpringStreet,
Inc. and HomeStore.com, Inc. until August 2000. Trading investments consist of
equity securities, mutual and bond funds that are held for the Supplement
Executive Retirement Plan (see note 8). The cost, unrealized gains before
applicable tax and fair value of the investments at December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Unrealized Fair
Cost Gains Value
-------- --------- ----------
<S> <C> <C> <C>
Available-for-Sale:
HomeStore.com, Inc. $ 3,300 $ 29,199 $ 32,499
Trading:
Equity securities, mutual and bonds funds 1,396 195 1,591
Equity ownership 1,000 -- 1,000
-------- --------- ----------
Total $ 5,696 $ 29,394 $ 35,090
======== ========= ==========
</TABLE>
In February 2000, the Company sold 90% of its investment in HomeStore.com, Inc.
resulting in a realized gain of approximately $32,442,000.
7
<PAGE> 9
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES
Components of the expense for income taxes are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
---------- ----------- ---------
<S> <C> <C> <C>
Current:
Federal $ 9,037 $ 11,275 $ 13,065
State and local 2,453 2,870 3,293
-------- -------- --------
11,490 14,145 16,358
-------- -------- --------
Deferred:
Federal 3,515 4,161 2,791
State and local 603 601 399
-------- -------- --------
4,118 4,762 3,190
-------- -------- --------
Total expense before extraordinary
loss $ 15,608 $ 18,907 $ 19,548
Income tax benefit from
extraordinary loss on early
retirement of debt -- (1,672) --
-------- -------- --------
Total income tax expense $ 15,608 $ 17,235 $ 19,548
======== ======== ========
</TABLE>
The difference between the actual expense for taxes and taxes computed at the
Federal income tax rate of 35 percent in 1997, 1998 and 1999 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Tax expense computed at Federal rate $ 13,277 $15,684 $16,187
State and local taxes, net of Federal benefit 1,986 2,153 2,400
Effects of goodwill amortization 395 397 415
Other, net (50) 673 546
------- ------- -------
Total expense before extraordinary loss $15,608 $18,907 $19,548
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 1,271 $ 1,207
Compensated absences, principally due to accrual for
financial reporting purposes 989 1,263
Deferred rental revenue 4,617 5,624
Reserve for unfavorable operating lease and duplicate
facilities 829 972
Reserve for purchase options and shrinkage on rental
property 1,130 1,188
Accrued insurance 991 1,012
AMT credit carry forward 104 104
Other 2,036 1,630
------- -------
Total gross deferred tax assets 11,967 13,000
------- -------
Deferred tax liabilities:
Rental furniture, principally due to differences in
depreciation 29,320 33,474
Property, plant and equipment, principally due to
differences in depreciation 2,453 1,821
Unrealized gain on investment -- 11,680
Other 1,013 1,712
------- -------
Total gross deferred tax liabilities 32,786 48,687
------- -------
Net deferred tax liability $20,819 $35,687
======= =======
</TABLE>
8
<PAGE> 10
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
As of December 31, 1999, the Company is expecting refunds from Federal and state
taxing authorities of approximately $1,215,000 that are included in other
receivables and assets. The Company has alternative minimum tax credit carry
forwards of approximately $104,000 which are available to reduce future Federal
regular income taxes, if any, over an indefinite period.
(7) LONG-TERM DEBT
The outstanding long-term debt at December 31, 1998 and 1999 consisted of a
revolving credit facility. CFR maintains a revolving credit facility with a
group of banks. This facility, for which the Company is guarantor, provides a
$125 million line of credit to meet acquisition and expansion needs as well as
seasonal working capital and general corporate requirements. The revolving
credit facility expires February 2002 and is unsecured but does restrict the
ability of CFR to pledge its assets as security. This facility also restricts
the ability of CFR to make advances and pay dividends to the Company. Borrowings
under the revolving credit facility bear interest at a fluctuating rate based
on, at the Company's option, either the lead lender's base rate or the London
Interbank Offer Rate (LIBOR). The average interest rate paid by CFR during 1997,
1998 and 1999 on the revolving credit facility was 7.25%, 6.70%, and 6.27%,
respectively. A commitment fee calculated based upon the unused portion of the
revolving credit facility is payable quarterly in arrears. The Company had
approximately $4,753,000 in letters of credit outstanding at December 31, 1999
that reduced the borrowing base under the revolving credit facility. The Company
had approximately $35,847,000 available under the revolving credit facility at
December 31, 1999.
On September 10, 1998, the Company redeemed the remaining $49,932,000 of its 12%
Senior Notes at a price of 107% of the principal amount plus accrued and unpaid
interest to the date of redemption. The Company used borrowings under an
expanded credit line with its existing bank group to redeem the notes. As a
result of the early retirement of the Senior Notes, the Company recognized an
extraordinary loss of $2,508,000, net of income tax benefit of $1,672,000 in the
third quarter of 1998.
The estimated fair value of the Company's consolidated long-term debt
approximates book value.
Other assets include debt issuance costs, net of accumulated amortization, of
$201,000 and $137,000 at December 31, 1998 and 1999, respectively.
(8) EMPLOYEE BENEFIT PLANS
The Company maintains an investment and profit-sharing defined contribution
retirement plan. All the Company's employees are eligible to participate after
one year of service. The Company makes a 50 percent matching contribution on the
first four percent of employee contributions to the plan. The Company may, at
its discretion, make additional contributions based on the Company's
performance. The aggregate plan contributions were approximately $1,215,000,
$1,335,000 and $1,310,000 for the years ended December 31, 1997, 1998, and 1999,
respectively.
The Company maintains a Supplemental Executive Retirement Plan (SERP) for
certain key present and former management executives. The SERP consists of both
a defined benefit and a defined contribution plan. The annual costs of the plan
were approximately $152,000, $118,000, and $181,000 for the years ended December
31, 1997, 1998, and 1999, respectively. The accrued, unfunded liability under
the plan as of December 31, 1999 was not significant.
The Company maintains an employee stock purchase plan. All employees are
eligible to participate in the plan after 90 days of service. The price of the
shares purchased in the open market is the average price paid for all the shares
purchased by the broker on the investment date. The Company assumes the cost of
all brokerage commissions and service charges for all purchases made under the
plan. During 1998 and 1999, 10,672 and 3,909 shares of common stock were
purchased through the plan at average prices of $33.66 and $21.06 per share,
respectively. The employee stock purchase plan was halted in March 1999 after
the announcement of a proposed merger and resumed in December 1999 after the
termination of the related merger agreement (see note 17).
9
<PAGE> 11
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) STOCK OPTIONS
At December 31, 1999, the Company had four stock-based compensation plans, which
were adopted by the Board of Directors and approved by the Company's
stockholders. These plans are described below. The Company applies APB Opinion
No. 25 and related Interpretations in accounting for its plans. Accordingly, as
all options have been granted at exercise prices equal to the fair market value
as of the date of grant, no compensation cost has been recognized under these
plans in the accompanying consolidated financial statements. Had compensation
cost for the Company's four stock-based compensation plans been determined
consistent with FASB Statement No. 123, the Company's net income and earnings
per common share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net income
As Reported $22,326 $23,395 $26,701
Pro Forma $21,461 $21,783 $25,404
Earnings per common share
As Reported $ 1.74 $ 1.80 $ 2.04
Pro Forma $ 1.68 $ 1.67 $ 1.94
Earnings per common share --
assuming dilution
As Reported $ 1.67 $ 1.73 $ 1.99
Pro Forma $ 1.60 $ 1.61 $ 1.89
</TABLE>
The effects of compensation cost as determined under FASB Statement No. 123 on
net income in 1997, 1998 and 1999 may not be representative of the effects on
pro forma net income for future periods.
Stock Option and Stock Purchase Plan
Under the terms of the Stock Option and Stock Purchase Plan (the "1994 Plan"),
certain key employees were granted, at the discretion of the Board of Directors,
the right to purchase varying amounts of debt securities and options to purchase
common stock. Concurrent with the adoption of the 1994 Plan, all members of
management who previously held common stock of the Company gave up their rights
to such stock.
At the date of grant, each employee had the option to purchase immediately in
cash all granted amounts of the debt securities, or defer purchase of these
securities, plus interest, over a five-year vesting period. In either case,
assuming all obligations to purchase the debt securities were fulfilled, the
exercise price of the options to purchase common stock was fixed.
Contemporaneously with the initial public offering of the Company in 1995, all
debt securities were exchanged for common stock. There is no further obligation
to purchase debt securities under the 1994 Plan. An option under the 1994 Plan
vests over a five-year period and is exercisable over a ten-year period.
1995 Stock-Based Incentive Compensation Plan
The 1995 Stock-Based Incentive Compensation Plan (the "1995 Plan") became
effective on October 31, 1995. The 1995 Plan was amended in May 1997 to increase
the number of stock options available for grant. The 1995 Plan provides for the
granting of a maximum of 1,210,000 stock options to key employees of the
Company. The shares granted under the 1995 Plan may be in the form of deferred
stock, restricted stock, incentive stock options, non-qualified stock options or
stock appreciation rights. All awards made in 1997 and 1998 were in the form of
non-qualified stock options. There were no awards made in 1999. The exercise
price of an option under the 1995 Plan is equal to the fair market value of
common stock on the date the option is granted. An option under the 1995 Plan
vests over a three-year or seven-year period and the expiration period may not
exceed ten years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1998, respectively: 0.0% dividend yield
for all years; expected volatility of 30% for 1997 and 36% for 1998; risk-free
interest rates of 6.25% and 5.61%; expected lives of six years and seven years,
respectively.
10
<PAGE> 12
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 Directors Stock Option Plan
The 1995 Directors Stock Option Plan (the "1995 Directors Plan") became
effective on October 18, 1995. The 1995 Directors Plan provided for automatic
grants of options to purchase shares of common stock for each of the Company's
non-employee directors on November 16, 1995 and 1996. The option exercise price
per share is equal to the fair market value of common stock on the date the
option is granted. All options granted became vested on November 16, 1998. The
expiration period may not exceed ten years.
1997 Directors Stock Option Plan
The 1997 Directors Stock Option Plan (the "1997 Directors Plan") became
effective on May 14, 1997. The 1997 Directors Plan provides for the granting of
a maximum of 50,000 stock options to non-employee directors of the Company. The
1997 Directors Plan provides for automatic grants of 2,000 shares of common
stock for each of the Company's non-employee directors on the business day
immediately following the Company's Annual Meeting of Stockholders for calendar
years 1997, 1998, 1999, 2000 and 2001. The option price per share is equal to
the fair market value of common stock on the date the option is granted. An
option under the 1997 Directors Plan vests over a three-year period and the
expiration period may not exceed ten years. There were no grants in 1999 since
there was no Annual Meeting of the Stockholders in 1999.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1998, respectively: 0.0% dividend yield
for both years; expected volatility of 30% for 1997 and 36% for 1998; risk-free
interest rate of 6.54% and 5.74%; and expected lives of seven years for both
years.
<TABLE>
<CAPTION>
1995 1997
1994 Plan 1995 Plan Directors Plan Directors Plan
-------------------- ------------------ ------------------ ---------------------
Weighted Weighted Weighted Weighted
Shares Average Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price Option Price
------- --------- -------- --------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1996 574,998 $0.59 531,599 $ 13.94 31,000 $15.47 -- --
Granted -- -- 106,500 25.68 -- -- 10,000 $ 25.50
Exercised (70,565) 0.55 (50,115) 12.55 -- -- -- --
Forfeited (17,937) 0.79 (2,833) 18.31 -- -- -- --
------- ----- ------- ------ ------ ------ ------ ------
Outstanding at
December 31, 1997 486,496 $0.59 585,151 $ 16.18 31,000 $15.47 10,000 $ 25.50
Granted -- -- 479,500 36.92 -- -- 10,000 39.63
Exercised (78,834) 0.59 (60,259) 14.90 (3,667) 14.93 (667) 25.50
Repriced -- -- (70,250) 39.36 -- -- -- --
Forfeited (3,969) 0.71 (8,563) 21.65 -- -- -- --
------- ----- ------- ------ ------ ------ ------ ------
Outstanding at
December 31, 1998 403,693 $0.59 925,579 $14.34 27,333 $15.54 19,333 $32.81
Exercised (10,792) 0.62 (3,967) 17.41 -- -- -- --
Forfeited (4,440) 0.59 (24,915) 25.53 -- -- -- --
------- ----- ------- ------ ------ ------ ------ ------
Outstanding at
December 31, 1999 388,461 $0.59 896,697 $17.45 27,333 $15.54 19,333 $32.81
------- ----- ------- ------ ------ ------ ------ ------
Options exercisable at:
December 31, 1997 486,496 255,420 19,002 --
December 31, 1998 403,693 408,113 27,333 2,668
December 31, 1999 388,461 531,752 27,333 9,338
Weighted average fair
value at date of
grant of options
granted during
the year ended:
December 31, 1997 -- $11.01 -- $12.00
December 31, 1998 -- 15.63 -- 19.49
December 31, 1999 -- -- -- --
</TABLE>
11
<PAGE> 13
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the Company's stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ----------------------------------------------------
Weighted Average
Range of Number Remaining Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
----------- --------------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.2587- 1.098 388,461 4.47 $ 0.59 388,461 $ 0.59
12.00 329,459 5.88 12.00 329,459 12.00
17.6875- 29.1875 294,654 7.46 23.57 201,700 22.69
33.875- 40.375 319,250 8.32 40.02 37,264 39.23
--------- ---- ------ -------- -----
1,331,824 956,884
--------- ---- ------ -------- -----
</TABLE>
All of the Company's stock option plans and all outstanding options under the
plans were terminated in connection with the tender offer and merger pursuant to
which the Company became an indirect, wholly-owned subsidiary of Wesco (see note
2). In connection with such termination, holders of outstanding options with an
exercise price below $28.00 received cash for the difference between $28.00 and
the exercise price.
(10) RENTAL COMMITMENTS
The Company leases certain warehouse and showroom facilities and equipment.
Future minimum lease payments at December 31, 1999 under all non-cancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 22,655
2001 21,280
2002 18,791
2003 15,734
2004 12,335
Thereafter 35,835
---------
Total minimum lease payments 126,630
Less sublease rentals 1,346
---------
Net minimum operating lease payments $125,284
=========
</TABLE>
Rental expense, net of sublease income, was approximately $15,964,000,
$19,300,000, and $22,689,000 for the years ended December 31, 1997, 1998 and
1999, respectively (including approximately $3,880,000, $4,446,000, and
$5,230,000 for short-term vehicle leases).
(11) ACCRUED EXPENSES
Accrued expenses are comprised of (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
Accrued salaries, wages and incentives $ 5,627 $ 6,167
Accrued interest 727 257
Accrued vacation 2,474 3,158
Reserves for unfavorable operating lease and
duplicate facilities 2,230 2,198
Accrued property, payroll, sales and use taxes 2,685 2,413
Accrued insurance 2,477 2,530
Acquisition holdbacks 662 371
Other accrued expenses 4,194 5,145
------- -------
$21,076 $22,239
======= =======
</TABLE>
12
<PAGE> 14
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) WARRANTS TO PURCHASE COMMON STOCK
For the year ended December 31, 1998, 415,320 warrants were exercised for an
aggregate of 81,019 shares of the common stock. The warrants were subject to
certain anti-dilution provisions relating to issuances of the common stock. All
of the Company's warrants to purchase shares of common stock expired September
1, 1998. 18,480 warrants expired without being exercised.
(13) ACQUISITIONS
Instant Interiors Corporation
On August 14, 1998, the Company acquired certain assets of Instant Interiors
Corporation, a provider of rental furniture in the Midwest area, for
approximately $16,695,000, in a transaction accounted for as a purchase business
combination. Based on the allocation of the purchase price to the net assets
acquired, goodwill of approximately $8,025,000 was recorded. Such goodwill is
being amortized on a straight-line basis over 40 years.
Other Acquisitions
In 1997, the Company acquired certain assets of Alco Trade Show Services, Delta
Furniture Rentals, Inc. and Integrity Furniture Inc. In addition, the Company
acquired the stock of Levitt Investment Company and McGregor Enterprises. Each
of these transactions were accounted for as a purchase business combination.
Based on the allocation of the purchase price to the net assets acquired, a
total of approximately $10,860,000 of goodwill was recorded. Such goodwill is
being amortized on a straight-line basis over 20 to 40 years.
In 1998, the Company acquired certain assets of IS Furniture Rental Corp.,
Furniture Rentors of America, Inc. and the trade show furnishings business of
Aaron's Rents, Inc., as well as two other small businesses. Each of these
transactions were accounted for as a purchase business combination. Based on the
allocation of the purchase price to the net assets acquired, a total of
approximately $15,080,000 of goodwill was recorded. Such goodwill is being
amortized on a straight-line basis over 20 to 40 years.
In 1999, the Company acquired certain assets of Alco Furniture Rental and a
certain location of the rent-to-rent business of Aaron's Rents, Inc. Each of
these transactions was accounted for as a purchase business combination. Based
on the allocation of the purchase price to the net assets acquired, a total of
approximately $5,316,000 of goodwill was recorded. Such goodwill is being
amortized on a straight-line basis over 40 years.
(14) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income before extraordinary loss $22,326 $25,903 $26,701
Extraordinary loss, net of taxes -- 2,508 --
------- ------- -------
Net income applicable to common shares $22,326 $23,395 $26,701
======= ======= =======
Weighted average shares outstanding 12,804 13,019 13,095
Effect of dilutive securities:
Stock options 489 443 324
Warrants 85 29 --
------- ------- -------
Weighted average shares and assumed
conversions 13,378 13,491 13,419
======= ======= =======
Earnings per common share before
extraordinary loss $ 1.74 $ 1.99 $ 2.04
Extraordinary loss per share -- .19 --
------- ------- -------
Earnings per common share $ 1.74 $ 1.80 $ 2.04
======= ======= =======
Earnings per common share before
extraordinary loss--assuming dilution $ 1.67 $ 1.92 $ 1.99
Extraordinary loss per share--
assuming dilution -- .19 --
------- ------- -------
Earnings per common share-- assuming
dilution $ 1.67 $ 1.73 $ 1.99
======= ======= =======
</TABLE>
13
<PAGE> 15
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires CORT to present
certain information about each identified segment that exceeds certain
quantitative thresholds for revenue, profit or loss, and assets.
The Company has identified the following operating segments:
Furniture Rental - rental of residential and office furniture
and accessories to individual and corporate
customers.
Furniture Sales - sale of new or previously rented residential
and office furniture to the general public.
Trade Show Operations - short-term rental of display and workplace
furnishings for trade shows, conventions, and
special events to corporate customers and trade
show associations.
Housewares Operations - rental of kitchen, bedroom and bathroom
accessories to the Furniture Rental segment.
Furniture rental and furniture sales segments represent the aggregation of
individual districts, all of which have similar economic characteristics and
distribution methods.
Trade Show Operations and Housewares Operations do not meet the quantitative
thresholds outlined by SFAS No. 131 and are aggregated with furniture rental and
furniture sales for reporting purposes.
The Company reports separately, in its Consolidated Statements of Operations,
the revenue and associated cost of revenue of its remaining reportable segments.
Operating segments are measured on the basis of gross margin; operating
expenses, goodwill amortization, interest expense, tax expense, and
extraordinary items are not allocated to the individual segments.
Assets and liabilities are not specifically allocated between Furniture Rental
and Furniture Sales. All rental furniture is available for rental or sale.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- --------- ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Furniture rental revenue $71,795 $73,096 $74,352 $75,989
Furniture sales revenue 14,569 14,970 15,348 13,965
Operating earnings 13,354 14,178 13,547 10,939
Income before income taxes 11,933 12,824 12,063 9,429
Net income 6,893 7,442 6,991 5,375
Earnings per common share $ .53 $ .57 $ .53 $ .41
Earnings per common share--
assuming dilution $ .51 $ .55 $ .52 $ .40
</TABLE>
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- --------- ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Furniture rental revenue $62,814 $65,065 $68,477 $69,515
Furniture sales revenue 12,629 13,065 14,254 13,145
Operating earnings 12,575 13,354 13,881 12,837
Income before income taxes and
extraordinary loss 10,608 11,283 11,755 11,164
Income before extraordinary loss 6,191 6,520 6,795 6,397
Earnings per common share before
extraordinary loss $ .48 $ .50 $ .52 $ .49
Earnings per common share before
extraordinary loss--assuming dilution $ .46 $ .48 $ .50 $ .48
</TABLE>
14
<PAGE> 16
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) TERMINATED MERGER
In March 1999, the Company executed a definitive merger agreement with an
investor group that included Bruckmann, Rosser, Sherrill & Company, Inc. ("BRS")
and members of the Company's management team. In August 1999, the terms of the
merger agreement were amended. In November 1999, the Company and BRS mutually
terminated the merger agreement. As a result of the termination of the merger
agreement, the Company recorded approximately $2,121,000 of non-recurring
charges related to the merger transaction.
On March 26, 1999 and April 1, 1999, respectively, Harbor Finance Partners and
Michael Sternberg, alleged stockholders of CORT, each filed suit against CORT,
CVC, CORT's Chief Executive Officer and Director Paul Arnold, and Directors
Charles Egan, Michael Delaney, James Urry, Gregory Maffei, Keith Alessi and
Bruck Bruckmann in the Delaware Court of Chancery. The complaints purport to be
class action complaints and plaintiffs seek to enjoin the merger or, in the
alternative, to rescind the transaction and/or seek compensatory damages and/or
rescissory damages. Plaintiffs allege breaches of fiduciary duties owed by the
defendants to CORT's stockholders, and claim that the price to be paid for
shares under the merger agreement is unfair and inadequate. On June 24, 1999,
Harbor Finance Partners filed an amended complaint adding BRS as a defendant.
On March 26, 1999, Harold Shapiro, an alleged stockholder of CORT, filed a
similar class action lawsuit in the Delaware Court of Chancery. Plaintiff
Shapiro also names as a defendant BRS. Plaintiff Shapiro also claims that the
defendants breached their fiduciary duties, or aided and abetted any breach, and
alleges that the defendants failed to make an informed decision related to
CORT's value and that the price to be paid for shares under the merger agreement
is unfair and inadequate. Plaintiff Shapiro seeks injunctive, rescissory and/or
compensatory relief.
The time for defendants to respond to these complaints has been extended until
the cases are consolidated and a consolidated complaint is designated. CORT
believes that these claims are without merit. CORT, the directors, CVC and BRS
intend to vigorously defend the actions.
15
<PAGE> 17
CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
CORT Business Services Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of CORT Business
Services Corporation and subsidiary as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CORT Business
Services Corporation and subsidiary as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Washington, D.C.
February 14, 2000,
except as to Note 2
which is as of March 3, 2000
16
